Monday, February 26, 2007

The best way to increase your profits is to do it in a way that is totally under your control. It should NOT depend on customers taking a price increase, or on vendors to reducing prices, or on the economy.

You can increase your profits by uncovering capacity (or utilizing excess capacity) and then selling it. The new sales dollars minus the raw materials will drop to your bottom-line.

There are many tools that can help you to uncover the capacity (Goldratt’s Theory of Constraints, Lean, Six Sigma) and many manufacturers already have plenty of excess capacity. So the challenge lies in selling it.

In the accompanying interview I gave an example of how a company, in what is considered a commodity business, developed a mafia offer – a competitive advantage or unrefusable market offer that their competitors can’t or won’t copy.

All of our consulting projects start with a 3 day Mafia Offer Boot Camp. Then if you want our help in getting your operations in shape and in implementing your mafia offer – we only get paid if your PROFITS increase. 100% of our payment is dependent on your profits increasing. In addition, we will also provide a no charge analysis so that you know if the investment in the boot camp is worth it for you. That’s our Mafia Offer to you!

Below is a written summary of the interview which included 3 questions.

1) Focusing on industry as a whole (i.e. your customers) what are some of the largest challenges that small and midsize manufacturing firms are facing today?

A reoccurring theme is the ability to increase sales AND have a proportional increase in profits. We see manufacturers that successfully increase sales, but then increase profits very little or not at all.Then there are the manufacturers who remember their best year of profits but have never hit that level again and despite all their efforts can’t seem to get their profits to the desired level. They’ve been in business for 20 years and have tried everything.

So I would summarize it as – manufacturers are challenged to meet their profit goals year after year.

2) What are some of the solutions to these issues?

To have a substantial impact on profits you have to do 2 things:1) increase your capacity with little or no investment and2) sell the newly exposed capacityIf you can uncover capacity or if you currently have excess capacity and you sell it, the sales dollars minus your raw material costs drop directly to the bottom-line.

This leads to profit increases without having to depend on other traditional approaches that prove difficult – price increases, raw material decreases, or operating expense reductions.

3) How is your company positioned to address some of these issues?

We use Theory of Constraints tools like many manufacturers have read about in the best sell book , The Goal, along with Lean and Six Sigma to achieve substantial capacity gains in operations. The minimum capacity increase we achieve is typically 50%. These tools have been around a long time and there are 1000s of success stories. However, if we can’t sell any of this newly uncovered capacity we have had no bottom-line effect.

So now, let’s talk about how to turn that capacity into profits by selling it.

We help clients create what we call a “mafia offer”. We don’t break knee caps or anything, a mafia offer is an offer that is so good that your customers can’t refuse it and your competition can’t or won’t offer the same thing.

Mafia Offers are developed by analyzing 3 things. 1st what are (or could be) your internal capabilities compared to your competition. 2nd How does your industry, you and your competitors sell what you sell. And 3rd Understanding how your clients are impacted by your current capabilities and how you sell.

Mafia Offers are specific to a company. So while an example would not apply to you, it is a good way to illustrate what a mafia offer is.

I have a client that sells custom printed labels. These labels are found everywhere on just about every product and are considered by many to be a commodity. Their quoted lead-times were 2 to 3 weeks and their due date performance was about 80%. We started with the operations and were able to get lead-times down to 2 days and due date performance to 99%+. Sales remained stable. This was significant since their competition was at a 2 week lead-time and around a 90% due date performance.

Next, we looked at how the printing industry sold labels. They used a price quantity curve. The more labels you order the less you pay per label. If you only want one label, the price is very high.

Then, we looked at how their specific customers purchased and used the labels because an offer is only a mafia offer if it is un-refusable to your specific customers. In this case, their customers were regional size food and beverage manufacturers. One customer was a coffee roaster who roasted many different varieties of coffee and sold them in several sizes so they need about 100 different labels.

Now when they looked at the price quantity curve they decided to order what was equivalent to 6 months of labels. To decide how to spread the quantity across the 100 labels they had to forecast what they would sell. But because their forecasts were always wrong, they ended up with too many of some labels while stocking out of the labels for the fast moving coffee. We know that this was happening because they would call frantic to get more of what they just stocked out of.

We also found that their marketing departments felt limited because they could only make changes every 6 months, after they worked through the inventory.

So we make the following offer:Mister customer, don’t give me orders. Your orders are based on your best guess of what you might need. Instead tell us everyday what you used. We will guarantee on the one hand that you will not need to hold more than 2 weeks of inventory so you have more marketing flexibility and less risk for obsolescence and at the same time we will also guarantee that you will never run out. If we ever stock you out, we will pay you $500 per day per SKU.

That’s a mafia offer – best of all worlds for your customer and you will not pay a penalty because it only takes you 2 days to replenish. The competition can not offer the same thing because they can not consistently deliver in less than 2 weeks and they could not risk paying the penalty.

What interesting is that we find mafia offers for over 80% of the companies we work with. So my questions for the listeners are:

How much capacity could you uncover or do you currently have? And What’s your mafia offer?